Q3 2023 Northwest Natural Holding Co Earnings Call

Good morning, and welcome to the Northwest Natural Holdings Company Q3, 2023 earnings call. My name is that nobody Roberts if its day.

If you'd like to ask a question in the Q&A portion of today's schools, but two separate pressing star followed by one on your telephone keypad.

I will now hand, the floor over to Nicky Chipotle to begin syndicating. Please go ahead when you're ready.

Thank you Adam.

Good morning, and welcome to our third quarter 2023 earnings call. As a reminder, some things that will be said. This morning contain forward looking statements. They are based on management's assumptions, which may or may not occur.

We've left the cautionary statement and refer to the language at the end of our press release, we expect to file. Our 10-Q later today as mentioned this teleconference is being recorded and will be available on our website. Following the call. Please note. These calls are designed for the financial community. If you are an investor and have additional questions. After the call.

Please contact me directly at 503, seven in Q1 25 30.

Media May contact David Roy.

3610, 70 157.

Speaking this morning are David Anderson, Chief Executive Officer, and Brody Wilson, CFO, Vice President Treasurer, and Chief Accounting Officer.

You didn't really have prepared remarks, and then will be available along with other members of our executive team to answer your questions with that I will turn it over to David.

Thanks, Nikki and good morning.

Welcome I'll start today with highlights from the quarter, and then turn it over to Brody to cover the financials.

I'll wrap up the call with a few updates on our de carbonization initiatives in our gas utility and recent news at our water and renewable companies.

The company continues to operate very well.

Gary posted strong financial results.

Reported net income of $1 37 per share for the first nine months of 2023 or 20% increase compared to $1 14 per share for the same period last year new rates in Oregon drove results at the natural gas utility along with customer growth and lower pension expense.

A few comments on the economies, where we serve we continued to see positive momentum in the local job markets related to our gas utility service territory.

Oregon's unemployment rate remained at three 5% on September 2023 below the national However, the national rate of three 8% unemployment rates in our highest growth water service territories range from two 7% in Idaho to four 6% in Texas are both of those are from August 2023 at the latest data.

We have that information.

County, where we operate in Texas experienced a four 3% population growth and the latest census data and corn Lane Idaho.

Hosted nearly 2% growth. These factors translated into good customer growth collectively our gas and water utility customer base grew by 4% or approximately 33000 meters over the last 12 months ending September 2023 that included more than 5200 gas customers and approximately 28000 water customers.

Mainly driven by six water acquisitions that we closed during the year.

Last week, we received approval for a rate reduction through our annual purchase gas adjustment in Oregon, and Washington, which related to lower natural gas prices for Oregon customers rates included reimbursement for to renewable natural gas facilities and three offtake RMG agreements.

But his upcoming heating season, the average, Oregon residential customer will see a 9% drop in rates, while Washington customers will see a 14% drop on top of that Oregon customers can expect to see a bill credit of approximately $30 million in February 2024 over.

Over the last 20 years, we've credited Oregon customers bills with savings savings totaling almost or over $235 million.

Despite inflation.

$3 billion investment in the system customers will be paying 8% less for their natural gas bills. This winter than they did 15 years ago.

Can't say that about many things. These days it is gratifying to be able to provide these savings and continue to provide affordable energy to our customers.

And finally this morning I'm pleased to report that in the fourth quarter. The board approved the dividend increase making this a 68 consecutive year of annual dividend increases Marcos Natural holdings is one of only three companies on the NYSE with this outstanding record with that I'll turn it over to Brian to cover the financials Brody.

Thank you David and good morning, everyone.

Again by discussing the highlights for the quarter and year to date results and conclude with guidance for the year.

Scribe earnings drivers on an after tax basis, using the statutory tax rate of 26, 5%.

A reminder, northwest Natural's earnings are seasonal with a majority of revenues and earnings generated in the first.

Fourth quarters during the winter heating months.

For the third quarter, we reported a net loss of $23 7 million or <unk> 65 per share compared to a net loss of $19 6 million or <unk> 56 per share for the same period in 2022.

At the gas utility earnings reflected higher operating expenses and interest expense, partially offset by new rates in Oregon and Washington.

Utility margin in the gas distribution segment increased $5 $3 million, mainly from new rates again on gas costs and customer growth.

Utility O&M increased $5 5 million, reflecting higher payroll costs information technology and contract labor costs as well as the amortization of deferrals.

Majority of these incremental costs were anticipated and are being recovered through our new rates.

Other income increased $3 $2 million.

Primarily from lower pension expense and higher interest income from invested cash.

Interest expense increased $3 $3 million due to higher debt balances and interest rates.

For the first nine months of 2023, we reported net income of $49 2 million or $1 37 per share.

<unk> to net income of $38 4 million or $1 14 per share for the same period in 2022.

The 23% or 20% increase in earnings per share is largely the result of a $35 that increased for our gas utility related to new rates in both Oregon, and Washington, This was offset by a 12% per share decline in our other businesses.

A few more details on the gas utility results.

Utility margin increased $46 $1 million related to new rates in Oregon, and Washington, which contributed $36 2 million.

Gains on gas costs added $4 $8 million and customer growth provided $3 1 million.

Gas utility O&M increased $22 $6 million, reflecting higher payroll information technology and contract labor costs as well as the amortization of deferrals.

Again, the majority of these O&M increases are being recovered through rates utility depreciation and general taxes increased to $7 $3 million due to additional capital investments.

Other income increased $8 $9 million, driven by lower pension costs and higher interest income.

Interest expense increased $9 4 million.

Primarily due to incremental long term debt financing net income from our other businesses decreased $4 1 million from higher interest expense.

For the night for the first nine months of 2023 cash provided by operating activities was over $300 million.

Year to date, we've invested $243 million and our systems related to safety reliability and technology nearly 90% of those capital investments for further gas utility.

Cash provided by financing activities was $80 million like many companies, we're managing higher financing costs and the current inflationary environment through a variety of measures, including carefully prioritizing work and diligently managing our costs.

Overall, we continue to be in a solid financial position. Our objective remains to keep our balance sheet strong with ample liquidity to support working capital needs and growth.

The company reaffirmed 2023 earnings guidance today for net income in the range of $2 55.

So two hours 75 per share guidance assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies.

Or outcomes or significant changes in laws legislation or regulations.

With that I'll turn the call back over to David Thanks.

Thanks, Brian turning to an update on the gas utility de carbonization activities. As we've said numerous times, we believe climate change requires rapid innovation, but doing so in a way that insurers in energy system reliability, and frankly true emissions reductions.

It's important to remember our starting point northwest natural has one of the tightest systems in the nation and we use that system to deliver 50% more energy than any other utility in Oregon in fact during winter peak demand periods, our systems our system delivers about twice as much energy as the electric system.

The natural gas, our residential and commercial customers use accounts for just under 7% of Oregon's greenhouse gas emissions, which are low to begin with we believe that's an efficient starting point, but we're working to reduce that number even further we believe a combination of de carbonization measures that include energy efficiency renewable energy.

Offsets and carbon capture are needed as a low carbon future.

Placing conventional natural gas over time with renewable natural gas and clean hydrogen is central to achieving that vision.

For the third year in a row renewable natural gas as part of our energy stack and we've begun procuring excuse me the gun recovering those costs through our purchased gas adjustment for Oregon customers.

Most recently our investment on the Dakota City renewable natural gas facility was approved by the Oregon Commission and included in rates on November one.

Our team continues to pursue renewable natural gas investments and opex for our customers.

We're seeing other countries make promising headway here to one example is Denmark impressively and Mark is already delivering nearly 40% renewable natural gas in our system by 2030. It expects one 100% of the natural gas system to be sourced entirely from renewable natural gas and <unk>.

Green gas resources, something that we hope to achieve.

We believe hydrogen that's also part of our long term energy future to that end, we're working on several clean hydrogen pilots with partner space in the United States and in Europe.

Currently our focus is on implications for industrial and commercial customers to help them meet 30 carbonization goals.

Hydrogen blending is also viable.

Several utilities have operated for decades with blends in their pipelines for example, Hawaii gas routinely reports, an approximately 12% blend and Singapore gas companies house consistently over 40% hydrogen in their system.

Right now our engineering team is working on blending 20% hydrogen Sherwood operations and training center after achieving 15% blending levels last year. So far testing has been positive.

Our team is also looking at new technologies, including carbon capture and sequestration and Brown source heat pump systems with natural gas backup just two additional web based to support peak heating needs, while reducing emissions.

I am excited by these advancements will continue to work on multiple fronts to advance decarbonisation efforts for our customers.

Moving now to an update on where cliffs natural renewables through this business, we're focused on providing cost effective solutions to help a variety of sectors decarbonize using existing wastewater springs and renewable energy sources. The renewable natural gas business represents an opportunity for us to add earnings and cash flows under long term contracts commensurate with our overall.

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As you May remember.

Close to actual renewables first project is with Edr, who is developing two production facilities designed to convert landfill waste gases to renewable natural gas.

Renewables has contracted to invest approximately $50 million in this facility and obtain a 20 year supply of renewable natural gas produced by these facilities once they are commercially operational instead.

Construction on both facilities has been completed operations have begun in the commissioning phase is underway right now the team is working through unexpected issues with the conditioning equipment and unfortunately that is causing a delay in achieving full operations.

Once operating we still expect steady cash flows and earnings from a long term off take agreements and we've negotiated with investment grade parties.

Turning to an update on northwest natural water, we continue to execute on that growth strategy in October northwest natural water closed the acquisition of Rose Valley water company located in Peoria, Arizona, a major suburb of Phoenix that acquisition added 2400 connections and provides another entry point into a high growth.

Recently, we also closed a week.

Another O&M service business this acquisition called Highland waters, which supports approximately 6400 connections across Oregon.

And in April this year, we lost a water services business and say we support over 16000 connections. This is a strong platform that can be scaled in the coming years.

At the same time, we continue to invest in our existing water and wastewater utilities to provide clean water and reliable service.

To support these investments were filing general rate cases is necessary to date, we've successfully completed multiple rate cases in Idaho, or Oregon, and Washington building construction pricing chips with our regulators recently file a general rate case at our largest utility foothills in Arizona, We look forward to working with Arizona Commission and staff.

In the coming months, but we continue to see increased levels of business development activity and remain excited about the investment potential for this business.

In summary, I am pleased with his management team and our employees. We have made substantial progress on major initiatives in 2023, I look forward to a strong team executing on these opportunities not only for the remainder of this year, but for years to come.

So thanks for joining us this morning with that Adam be happy to open it up to questions. If there are any.

Okay.

Wonder if you'd like to ask a question today. Please press star followed by one on your telephone keypad now to enter the queue with the parents I ask a question. Please ensure you're anticipating plugged in and unmatched locally.

One on your telephone keypad.

And our first question today comes from Julien Dumoulin Smith from Bank of America Julien. Your line is open. Please go ahead.

Yes, hi, good morning team.

This is tanner stepping in for Julien how are you guys doing.

Excellent. Thank you happy Friday.

Happy Friday.

Could you talk about the acquisition pipeline or rather kind of the availability of attractively priced opportunities youre seeing in the marketplace on the water side and what's your sort of run rate appetite, perhaps for these types of opportunities.

Yes in general I'll turn this over to Justin if I need to I'll come up with some other comments Justin I'll turn it over to you.

So we continue to have a robust pipeline of acquisition opportunities on the waterfront I think our run rate. If you look over the last five years, we're executing on somewhere between five and eight acquisitions per year and they range in size. Most of them are relatively small and then some of them are a bit.

Larger and.

We expect that to continue we see we still see robust activity there.

Even throughout this market.

Okay.

Great. Thanks for the color there and then kind of more of an accurate actuarial question here could you provide some color on the other income line with respect to the pension obviously you had the lower pension expense this quarter either.

What is the type of treatment of the expense in rates.

Smoothed out over five years could you just kind of provide some color there.

Yes. This is brody.

As far as the Ratemaking goes we do put in the test year for the rate cases, what our expected pension cost will be.

And that then gets approved in the rate case, so that would've been effective for US last November as we look forward in the current year, we are experiencing a bit of a benefit and that really is quite technical actuarial calculation issue that relates to how gains and losses get amortized through pet.

<unk> expense and it just so happens that gains and losses being amortized in the current year, there arent any being amortized because of the fact that the gains and losses didn't fall outside of the corridor.

Actuaries calculate so for us we're seeing a bit of a benefit there historically, we would say that typically there are some gains and losses that would flow through that number we're not seeing that this year. We're seeing just a large portion of it or just are our service cost hitting us right now.

Okay.

Alright, great. Thank you very much have a great weekend guys.

Thanks to Cantor thicker.

The next question comes from so monocular from Stifel. Your line is open. Please go ahead.

Thank you good morning.

Just a couple quick ones for me so as we think about the hydrogen opportunity that you guys are pursuing I guess, you've been doing some testing for a while yet obviously.

First a couple of other utilities that have it and I'm just wondering how long do you think before you introduce it into the system the things keep going the way.

Do you anticipate.

Jim do you want take that.

Oh well.

The work that we're doing on hydrogen.

You may now we've been doing blend testing at our Sherwood facility for a couple of years now we started out at a 5% planted wheat consistently stepped at both testing on our system that testing on <unk> equipment as well.

We're at 15% now and our goal by the end of this year or the first quarter next year and to step that up to 20%.

And we're doing that to demonstrate not only.

The efficacy at the brand, we're not seeing any kind of issues that we didn't expect to based on the blending we now that's already taking place.

Around the world.

But we're also doing it to invite in elected officials and other stakeholders to see the blending and action.

So that they can start attaching beyond that.

Approach in new technology in addition to that blending at Sherwood.

As we've mentioned that's why we're pursuing a number of pilot.

To test out methane hydrolysis equipment, so that turquoise hydrogen where youre basically taking natural gas producing hydrogen and then through that same process that creates a solid carbon output and that basically sequesters carbon you can use that outfit.

Carbon in the secondary market like asphalt.

So we're really excited about that technology, because we're seeing a number of different companies.

And to the market with solutions that range in size than the first pilot, we're actually selling the equipment next week with modern and hydrogen at our central facility.

Really excited about getting that off the ground, but we're also looking at a new technology from a Finnish company contact hike might.

And the reason we're excited about that as it has the potential to Glenn or to plan and to produce that solid carbon at a much larger scale. So it could be a really nice solution for our large customers.

I guess the bottom line is our view is that we're going to have hydrogen blending directly into the system, but we're also really excited about that as methane pyrolysis because you don't have to change in used equipment and it has the potential to have a pretty low cost point.

So.

A number of a number of pilots underway.

Also continuing with that and the carbon X pilot that we've talked to you about.

But the byproduct is kind of apparently currently substance that you can put in.

Again that has the potential to be a smaller and used equipment solution.

I think that there is no doubt hydrogen is going to be part of the solution that we're already looking at.

Hydrogen opportunities for procurement for our existing customers.

That hydrogen can be in a.

Those are at price point with R&D E procurement, we're going to be looking at that so I would say you know over the next five to seven years.

We expect hydrogen to be more of that.

Escalation for our system, but we have to start now and that's what we're excited about we're going to move as quickly as we can sell them and to be very Frank and I would be disappointed if it took that long personally.

Understood.

And then also you talked about where you thought.

I thought you were doing some pilot tests.

Small industrial scales with video.

Coming out of that.

Just just the technologies that I mentioned, we have that.

Two or three of our industrial book that we're under NDA to test some different.

Kinds of hydrogen applications.

We did lap the new team at Decarbonate de Carbonization services team that really are going to be specialized.

And sort of bespoke solutions for our industrial customers because as you know every process and equipment on and desktop customers site is different they need their sort of earned solution set. So we're excited about that team and already working with a handful of customers.

They focus on pilot.

Got it alright, thank you very much.

Thanks, and have a great weekend.

The next question comes from Chris <unk> from Siebert Williams shrink Chris Your line is open. Please go ahead.

Hey, everybody.

Just a question on water, Nevada has some sort of troubled systems. There is that a viable state for you and how do you look at it in the past.

Yeah, Hi, Chris This is Justin.

We have looked at that state in the past and certainly something thats on our radar out to date, we have not found anything that that's been.

Met our investment criteria, if you will but that doesn't mean that in the future but opportunity won't emerge.

Okay.

David you talked about Singapore being at 40%.

For hydrogen did they have significant and brutal mint issues, there and what is the.

Longer term outlook for how do you meet.

Mitigate the embrittlement question.

But Tim take that one sure hi.

You know I think that there is.

A lot of work that's been done and being done on a spread on that and it really there's a lot of factors that you have to sort of SaaS.

It's the type of the system.

That's slowly hydrogen for example.

Our system, we have a low pressure system about 50% of our system at Holly.

We have no cast iron and bare steel rehab that steel coated pipe. So when we're looking at that that research that's been done on in bread on that it's important to know that the research. We've been seeing is its potential when you're when you're flowing hydrogen to go from maybe a 100 year pipeline downturn.

Yeah, 80 year pipeline. So it's not it's not an issue any kind of short term and bread element that people are concerned with it's really what is that hyper link life rank and again, if it potentially youre going from 100 to 80 year pipe like we don't see that as an.

Issue I.

I don't know that Singapore system, particularly we could certainly find the characteristics for you, but I think the point is that that hydrogen blending has been happening around the world in different systems at different volumes, we know theres several blending project one in the U K they've been blending seven.

Hum development with 20% hydrogen there's a Germany project. That's just started with a 30% blend there is another UK project, where theyre going to take a low pressure system like ours, and just begin lending 100%.

<unk>.

There's issues around pipe and fittings and make sure that that they are learning sort of what is that.

Higher and blend and and how quickly could we potentially retrofit if we needed to certain parts of a low pressure system to get to those larger blend level.

Okay. Thanks.

Could you give us a little more detail about the <unk>.

<unk> projects with the conditioning issues can you give us some sense of what that's all about.

Yes, Hi, this is Justin I'm happy to talk a little more about that.

So as David mentioned in his prepared remarks construction is complete.

At the two facilities.

What the <unk> team and their contractors are working on right now is.

Really a component of the conditioning equipment as the cotwo removal process.

The technology related to that trying to get that to a point where it can support.

The specified volumes.

For the facilities and right now they are having a little bit of a challenge getting that up to the.

Full.

Volume metric levels.

And so they are working through some of the technical aspects there.

Determine exactly what the fixed should be but we expect that that'll be resolved in the coming weeks.

I think the key thing is that the field.

The field is producing the gross amount of gas is just the amount that they can actually put on the system is not.

But it needs to be right now okay.

Gotcha alright, thank you.

This will conclude today's Q&A session. So hand, the call back to David Anderson for some concluding remarks.

Adam Thank you very much I appreciate everybody joining us on this Friday.

Do you have any follow up questions I think Nicky very well also for media if you'd like to talk to David Roy you'd be happy to talk with you everybody have a great weekend. Thank you.

This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.

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Okay.

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